Some bright spots for local investors

Some bright spots for local investors
US President Donald Trump signing an executive order on the US’ withdrawal from the Trans-Pacific Partnership in the Oval Office of the White House while flanked by Vice-President Mike Pence (left) and White House Chief of Staff Reince Priebus (right).
PHOTO: Reuters

It has been barely a week since US President Donald Trump took office, but he has been swift in acting on his campaign promises.

On Tuesday, in his bid to make America great again, Mr Trump signed an executive order to withdraw US from the Trans-Pacific Partnership.

His Treasury Secretary nominee, Mr Steven Mnuchin, also took aim at China when he wrote that he would combat "currency manipulation" to defend American jobs, according to a Senate Finance Committee report seen by several US news outlets.

These protectionist policies are setbacks to trade-reliant Singapore. But there are some bright spots for local investors.

In a media briefing on Monday, SGX market strategist Geoff Howie highlighted several sectors - commodity, technology and transportation - that would benefit from a stronger US economy and US dollar.

These industries are reliant on exports to the US and US investments, explained Mr Howie.


In a report on Jan 17, DBS also highlighted some possible beneficiaries of a US recovery and strong US dollar.

One of them is CNMC Goldmine, a company involved in the exploring, mining, and processing of gold in Malaysia. It was listed on the SGX's Catalist board in 2011.

"With gold predominantly priced in US dollars, and operational costs mainly incurred in ringgit, CNMC Goldmine is a strong beneficiary of a higher, stabilised US dollar.

"However, as its net cash balance of US$33 million (S$46.8 million) (as at 3Q16) is kept in the ringgit, volatile forex movements could give rise to unrealised translation losses."

Another company to watch out for is Venture Corp, a technology firm headquartered in Singapore.

DBS said: "With 55 per cent of exports to the US, Venture will also benefit from both a recovery in the US and the strengthening US dollar.

"Costs are in ringgit while almost all of its sales are in US dollars. A well-managed company with fragmented ownership, it is also an attractive takeover target."

Smaller might be better in this alternative world of Mr Trump.

In his commentary on Mr Trump's inauguration speech and its implications on markets, investment strategist Jeffrey Schulze from US-based Clearbridge Investment thinks small cap stocks would perform well due to tax reform, a stronger US dollar and better insulation from potential trade wars.

Small-cap companies are firms with a relatively small market capitalisation.

Royce & Associates Portfolio Manager Bill Hench explained that the stock prices of small caps are driven by their earnings. This is as opposed to the big caps, whose price-earnings are more dependent on the bond and interest rates.

Mr Schulze added: "Most small cap companies have their revenues tied to the US. Many of these operators are going to be the biggest beneficiaries of the new tax code, adding more to their bottom line."

There are several cash-rich small caps listed on SGX. (See report below.)

Strong cash flow resilience is also notable in Singapore's IT sector, where about 60 per cent of them generate free cash flow, enabling sustainable dividend payouts to shareholders, said Mr Howie.

A DBS market report earlier this week noted that local investors might soon take a break from the Trump rally and focus on upcoming local events.

These include the Committee on the Future Economy report, the Singapore Budget and the results season that had just started.

"We are cautiously optimistic that the earnings downward revision trend can further decelerate or even come to a halt, given recent data that showed two consecutive months of growth in bank loans, non-oil domestic exports and industrial production numbers surprisingly on the upside, as well as stabilising oil prices," it said.


Some small-cap options on SGX

Photo: TNP Graphics

There are some cash-rich small-cap stocks listed on the Singapore Exchange.

They have a substantial amount of net cash residing on their balance sheets, and they are trading below 1 P/B.

The P/B ratio shows how much a business is trading above or below its net asset. It may be an indicator of its value.

When a P/B ratio is below 1, it can indicate that a stock is undervalued.

These companies are also trading below their net cash level (net cash/market cap is more than 100 per cent), which could mean that their stocks are trading at a bargain.

This article was first published on Jan 26, 2017.
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